cards Flashcards
Types of short term investments (MTC)
- Money Market: Overnight to year low risk investment
- Term Deposit: money invested for a set period of time at a fixed interest rate. Longer the term invested, higher the interest offered.
- Cash Management Trusts: Investors pool their money with other investors in a trust fund investment requiring a high minimum deposit. No set term, funds are easily accessed.
Types of LTI’s (STTUD)
- Shares: Part ownership of a company. Income comes from dividends (share of company profit) and capital gains (selling shares higher than purchase price). Volatile due to economic conditions and thus high risk.
- Trusts: Investors combine on ASX to buy shares. Returns can be higher than an individuals share investment. Funds easily accessible.
- Term Deposit: Term deposit but beyond one year long. Reliable interest income.
- Unsecured Notes (bonds): Work the same way as debentures but without security over assets. Higher returns than debentures but high risk as unsecured.
- Debentures: Secured loan from the public to a public company that has issued debenture through a prospectus, with a fixed interest rate and principal repayment at a later date. Low risk, low interest as is secured by company assets. As a secured creditor a debenture holder has payment priority over unsecured creditors and shareholders if company is liquidated.
Role of financial institutions
Accept deposits, lend money, give advice.
Management accounting
Providing information to internal management to support day to day management decisions and facilitate strategic direction.
Financial accounting
Preparing and presenting GPFS to external users in order to help them make sound economic decisions about the entity’s financial performance, position and cashflow.
Internal reporting
Type of accounting: Management accounting
Users: Internal users
Management only- managers, CEO, sole traders, partners
Reports: Special purpose internal reports eg financial budgets, sales forecast, market analysis
Flexible format, info is tailored to management needs
Financial and non-financial
Estimates, future orientated
Regular, timely, on demand as requested by management
Financial Statement Types: Financial position
Financial performance
Cash flows
Regulation: No regulation
Aren’t required to be audited as they don’t have to comply with accounting standards
External Reporting
Type of accounting: Financial accounting
Users: External users-
Existing and potential investors
Lenders and creditors
Customers, general employees
Regulatory authorities (ATO, ASX)
Reports: A written document called an annual information statement (FP, FP, Equity, cash flow, CSR report, auditors report) must be issued to shareholders.
Specific, consistent format as per accounting standards
Historical and verifiable data
ASX, ATO and accounting standards require reports at regular intervals.
Financial statement types: 4 general purpose financial statements
Regulation: Highly regulated
Must comply with accounting standards, taxation and corporations law
Must be audited, submitted to ASIC
Must meet ASX disclosure rules if public
Internal control
refers to the policies and procedures a business uses to safeguard assets, increase accountability, increase efficiency and ensure there is compliance with laws, accounting standards and regulations.
Internal audit
the review of the business operations and internal control procedures to ensure they are being adhered to and working efficiently and effectively.
Done by an internal employee.
Purposes of internal audit
Review of business policies and procedures: Management put in place policies for employees to follow to minimise risk and ensure efficiency and accuracy in procedures. Need to check external regulation and staff compliance. Failures can affect customer service and employee satisfaction.
Detect and correct errors/ deficiencies: To find errors in a business’s internal system and controls, an internal auditor or any member of staff who is not directly related to the areas being audited is necessary. Ensures done in an objective manner. Then report back to management any errors that need correcting.
Role of the accountant
Assist the owners, directors and managers with the information needed to make informed decisions and maximise profits.
Function of the accountant
Design a financial system, supervise and record financial transactions, collect information, produce reports, ensure compliance with laws, provide advice, review and suggest strategies for control of assets and financial systems.
financial principles of asset management
table in document
Insolvency definition
A business is solvent if they can pay all their debts as they become due and payable. A business that is not solvent is insolvent. Regulated by Corporations Act.
Options for insolvent companies
- voluntary administration
- liquidation
- recievership
Voluntary administration
When the company directors or a secured creditor appoints an external administrator who will take over company operations and find the best solution for creditors. The voluntary administrator will investigate company affairs and then recommend to creditors whether the company should enter into a deed of company arrangement, go into liquidation or be returned back to the directors control. A deed of company arrangement is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with.
Liquidation
Liquidation can occur in two ways:
* Involuntary- Creditor applying to court.
* Voluntary- Shareholders vote to be wound up and appoint a liquidator or when creditors vote for liquidation following voluntary administration.
Liquidator takes control of the company so its affairs can be wound up and the company deregistered. Involves ceasing operations, selling assets, and distributing the proceeds among its creditors and shareholders according to the Corporations Act.
Order of creditor repayment is as follows:
1. Liquidator fees
2. Secured creditors eg debenture holders
3. Employee wages, superannuation, leave
4. Unsecured creditors
5. Shareholders
Receivership
A receiver is appointed by a secured creditor to take control of and sell secured assets. Receiver then pays out the money collected and reports to ASIC any possible offences they come across. Receivership ends when they have sold enough secured assets to be discharged by the secured creditor. Full control of the company and any remaining assets then goes back to the directors.
Corporate Social Responsibility
when a business implements processes for protection of environment and the good of society. Concerned not just about profit but the triple bottom line. For example recycling, reducing pollution, employee safety, donating to charity.
Costs of CSR
- Training staff
- Accommodating for special needs
- Cost of donations
- Purchasing more expensive green products
Benefits of CSR
- Competitive edge
- Employee loyalty
- Reputation
- Avoiding fines from gvt
- Possible cost saving like less water use
Capital investment
involves the purchase of NCA or a significant outlay of cash for a project that is expected to produce a cash inflow over a period of time over one year. Eg plant, equipment, large advertising campaigns.
Importance of capital investment
necessary for business growth by improving competitiveness and market share, increasing sales revenue, improving efficiency or operating capacity.
time value of money
refers to the fact that a dollar today is worth more than a dollar promised at some future time.
Inflation and compound interest
Nature of capital investment
- Large sum of money
- Long period of time
- Can not be easily reversed
- Substantial risk involved
Qualitative factors affecting capital investment decisions
Qualitative aspects: Descriptive and conceptual factors. Major qualitative factors are
Consumer preferences:
Respond accordingly to changing preferences with suitable capital investment. Investment that meets consumer preferences will lead to a higher return. However if they change during a projects life it may fail.
Competition:
A business must keep up with or get ahead of its competitors and this may require additional investment. If a competitor is launching a new product or better and more efficient technologies, decisions must be made about a response. Could lose market share.
Government regulations:
Capital investment may be required to comply with local, state and national laws and government regulations such as workplace standards or energy use. If regulations change management will have to invest capital to modify or replace existing infrastructure. Government may also offer subsidies and tax rebates. For example solar panel subsidies. Regulation changes must be taken into account when predicting future income and costs of investment.
Why is NPV better measurement than payback period
NPV is the better measurement as it takes into account time value of money, is more accurate and payback period doesn’t measure inflows past the payback period.
Cost accounting
involves the calculation, recording and evaluation of the costs of operating a business and producing goods.
Cost elements
Materials: Direct materials are the materials and parts directly used to manufacture a product or provide a service for example wood or steel. There are usually some indirect materials such as fuel or oil for machinery that relate to manufacturing in general but not directly.
Labour: Direct labour includes wages and other payroll costs of the employees that directly work to manufacture the product
Manufacturing (factory) overheads: All the costs indirectly related to manufacturing product or provision of service. For example rent, insurance. Indirect labour and material costs are included.
Cost behaviours
Fixed costs: Fixed costs do not change as business activity changes. Eg rent, depreciation
Variable costs: Those that change as level of business activity changes. Eg materials, direct labour
Mixed costs: A combination of fixed and variable. Eg telephone, electricity
Relationship to cost objects
Direct costs: Able to be traced to a manufactured product or service with a high degree of accuracy.
Indirect costs (overheads): Manufacturing costs that are not easily traced to a product or service. They are too insignificant to make it worth tracing to the finished product.
Product costs
Relate to the manufacture of a product or provision of a service. Thus all direct and indirect costs can be regarded as product costs. DM+DL+OH.
Period costs
Relate to an accounting period and not to the manufacture of products. They are the general operating costs of the business; finance, selling and general and admin.
Time orientation of costs
Past (sunk) costs: Costs that have already occurred, cant be reversed and hence have no impact on current decisions.
Future costs: Relevant costs as they are anticipated relevant to current decisions about a specific job.
Nature of master budget
- Amalgamation of all budgets
- Three main components: Operating budgets, Capital expenditure budget, Finance budgets
- Usually over a 12 month period.
Importance of master budget
- Strategic direction for achieving business goals by use of business resources
- Coordinating departments work together to achieve goals
- Motivate staff through goals
Operating budget
- All information about income and expenses
- Sales budget is completed first as all other budgets in the operating budget must meet these goals.
- Manufacturing businesses will make a production budget (DM, DL, OH) whilst trading businesses will have a purchases budget.
Capital expenditure budget
- Amount and timing of noncurrent asset purchases
- Is risky for business so must be planned carefully
- Done before cash budget and budgeted balance sheet but after operating budget
Financial budget
- How business will be financed
- Shows impact of plans on assets, liabilities and equity.
- Includes cash budget and budgeted balance sheet
Purpose of cash budget
- Cashflow and liquidity management
- Ensures cash is available to meet future needs
- Reveals cash shortages or surpluses to fix/utilise
- Comparison with actual cash performance
Function of a cash budget
- Estimates all cash received and paid
- Short-term basis – monthly, quarterly
- Control over cash as liquidity is crucial for business survival
Importance of having cash available
- Debts can be paid, business survives
- Credit rating
- Day to day expenses paid so business can actually operate
- Invested to create more income
Purpose of budgeted income statement
- Problems such as low profit or high expenses revealed so action can be done to prevent
- Comparison with actual outcome
- If expected profit is realistic
Function of budgeted income statement
- Calculates budgeted profit from estimated income and expenses
- Accrual basis
- BDA required
- Usually prepared for a longer period than cash budget eg quarter, 6 months, year
Purpose of performance reports
- Identify variances so management can better control in future
- Controlling function of management
- Performance management
Function of performance reports
- Alter future budget expectations
- Unfavourable/ favourable variances investigated
- F variations can be used to reward employees
Performance management
reviewing performance reports and determining where future improvements can be made.
Why do businesses plan
Reduce risks and costs
Business planning stages
- Development of goals
- Make objectives to ensure goals are met.
- Strategies to meet these objectives:
Cost leadership refers to having low prices through being efficient. The lowest sale price is achieved through low COS and reducing wastage and inefficiencies. Eg. Bunnings
Differentiation focuses on having a distinct g or s from competing products. Allows a higher price to be charged. E.g David Jones - Operational decisions to put strategies into effect.
How is public company different to large proprietary?
Owners
1+
Directors
Min of 3 and 1 secretary. 2 of directors must reside in Aus
Transfer of ownership Unrestricted transfer of shares via listing on ASX. Can be offered to public
Annual General Meeting
Once a year. Shareholders need 28 days notice
How is large proprietary company different to public?
Owners: 1-50 shareholders
Directors: Min of 1. No secretary needed
Ownership transfer: Transfer of shares can be restricted on constitution. Can’t offer shares or debentures to public
No AGM needed
Accounting standards
legal guidelines that must be followed by accountants of reporting entities in the preparation and presentation of financial information. Ensures GPFS are consistent and provide a sound representation of FP and FP
3 purposes of accounting standards
- Protecting external users
- Assist directors in meeting reporting obligations to shareholders
- Confidence to investors in Aus capital markets
Purpose of the Conceptual Framework
describe the objectives of, and concepts for, GPFR. This assists reporting consistency
Key elements of the Conceptual Framework
- nature of reporting entity
- objectives of GPFR
- fr vcut
- component recognition criteria
What is a reporting entity
an entity that is required to or chooses to prepare financial statements.
A reporting entity is required to prepare financial statements if it has public accountability meaning it has external/primary users (investors, lenders, creditors) reliant on their reports to make decisions.
Public companies are reporting entities, but may include proprietary companies as well if shareholders aren’t part of management
Objective of GPFR
provide financial information about the reporting entity that is useful to external users in evaluating returns and deciding to give resources or not
Fundamental and enhancing characteristics of financial information to make info useful to primary users
FUNDAMENTAL
- Relevance: Capable of making a difference in business decisions, meaning it is material and its omission or misstatement will influence decision making. Predictive or confirmatory value (future/past events).
- Faithful representation: Information must be complete (all info necessary), neutral (no bias) and free from error.
ENHANCING
- Verifiability: Different people independently agree the economic events info is correct. Direct means verifying through direct observation like counting money and indirect means verifying through a recalculation eg depreciation.
- Comparability: Information should allow users to see similarities and differences over time. Done through consistency in policies and methods over time.
- Understandability: Users with reasonable knowledge can comprehend and interpret the information.
- Timeliness: Info is available in time for it to influence decision making. Older means less useful.
Asset and liability recognition criteria
Relevant- information must be useful to users of the financial statements and make a difference in their decision making.
Faithful Representation- Item must be honestly measured in monetary terms ie Historical cost, current value or an estimate. Transaction must be complete, free from bias and free from error. If it can be measured with a high degree of accuracy, it is faithful representation.
Asset definition
A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has potential to produce economic benefit.
Liability definition
A present obligation of the entity to transfer an economic resource as a result of past events.
A-L
Equity
Income definition
Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than equity contributions.
Expense definition
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than distributions to equity holders
Nature of Corporations Act 2001
All companies are formed operated and wound up according to it.
Reporting entities must comply with accounting standards under it
Administered by ASIC and companies are required to prepare audited financial reports to be lodged with ASIC.
Replaceable rules
basic rules for internally managing a company included in the Corp Act that can be replaced in Constitution
written Constitution
Instead of just using the replaceable rules a company may use a constitution to regulate the internal operations of the company and change some RR.
Prospectus
document issued by a public company inviting the public to purchase their shares.
ASIC, ASX review before issue
Director powers
- Managing business of the company
- Recommend dividends
- Inspecting the books during legal proceedings
Duties of directors
- No use of information or position for personal gain
- Act with care and diligence in best interest of shareholder
- Inform other directors of any conflict of interest
- No insolvent trading
Rights of shareholders
- Receive dividends
- Attend, discuss and vote at shareholder meetings
- Get a copy of the annual financial reports
Nature/Importance of IASB
Independent, private body that develops International Financial Reporting Standards. 14 members.
- Approve interpretations of IFRS
- Develop IFRS
- Improve world financial reporting
Nature/Importance of FRC
Made by federal government to provide strategic direction and oversee effectiveness of financial reporting and accounting standards in Australia.
- Give federal treasurer reports on the standard setting process
- Advisory body to AASB
- Approve and monitor AASB plans
- Appoint AASB members, except Chair who is appointed by treasurer
Nature/Importance of AASB
Government body that considers the work of the IASB in issuing Australian standards for all reporting companies. Appointed by FRC except the Chair.
- Develop a Conceptual Framework
- Adopt and develop Accounting Standards under Corporations Act for Australia
- Analysis of proposed accounting standards
Nature/Importance of ASIC
Independent government body set up to administer ASIC Act 2001.
- Check and approve company registration
- Ensures financial markets are fair and transparent
- Known as the Watchdog of Corporations Law as enforces Standards law and investigates illegal activities
- Maintain, facilitate and improve Australia’s financial system
ASX
Publicly listed company that provides facilities for listing and ownership transfer of public companies.
- Provide confidence in share trading
- Monitor compliance with Listing Rules
- Concerned with preparation and presentation of financial statements
Lobby group
A group of people trying to influence an authoritative body to serve their own interests.
External audit
an independent examination of the financial records prepared by reporting entities.
how is an external auditor appointed
Appointed by the shareholders and reappointed at the AGM
Function of external audit
- protecting external users of financial statements in making decisions
Audit confirms reports provide a true and fair view of entities financial position and performance. - providing confidence to stakeholders in Australian Capital Markets as financial information has been seen by an objective professional
Role of external auditors
- Check financial statements are a true reflection of company
- Conformity with Acc Standards
- Find any wrongdoings like insolvent trading
Cash
Cash on hand (coins) and demand deposits (CAB)
Cash equivalents
Short term, highly liquid investments that are readily convertible (within 3 months) to known cash amounts and have insignificant risk of value changes (deposits on short term money market, not shares).
Benefits of CFS
- Assess ability of entity to generate CACE
- Helps users make decisions
- Enhances comparability
CSD
the practice of measuring and disclosing activities relating to economic, social and environmental performance.
Difficulties in producing social and environmental information
- No clear guidelines
- Comparisons are difficult
- Smaller businesses may not have the resources
- Not audited externally so info could be false
- Large amount of info needed
Who uses CSD
CSD can be used by internal users (directors, managers) and external users (investors, lenders, suppliers) to judge business actions and make decisions
What can CSD assist with?
- Non-financial success
- Employee morale and motivation
- Public reputation and trust
Limitations in assessing performance from ratio analysis
Historical cost:
Ignores depreciation
Lack of comparability: Comparisons can only be made if reporting is consistent and policies may differ
Lack of disclosure:
Some disclosures aren’t mandatory under law. eg other expenses in income statement is vague
Doesn’t account for external economic factors: A poor performance may have actually been good during that period. For example company performance during covid.
